Seller Financing: Get a Loan to Buy Rental Property Directly from the Owner

What is Seller Financing?

Out of the many loan options available for real estate investment, seller financing is the one in which the property owner themselves becomes the lender and offers a loan to buy rental property. With this loan, the investor or homebuyer can purchase the owner-occupied house in smaller monthly payments while simultaneously earning rental income.

In many regions, seller financing is also known as owner financing or bond-for-title and helps property owners diversify their profits. First, they get complete purchase price of the property and then the customer also pays interest on the loan to buy rental property.

Benefits of Seller Financing

Seller financing can be a useful option for numerous real estate investors. Let’s take a closer look at the advantages and see if it is the right option

1. Eliminates All Intermediaries

Property loans usually have some sort of intermediaries or real estate agents involved. These can either be banks or third-party lenders. For commercial properties, even organizations like SBA and credit unions can be involved to issue business loan to buy rental property. However, in several situations, investors don’t prefer to have an intermediary involved. In this case, they can opt for seller financing. prefer to have an intermediary involved. In this case, they can opt for seller financing. prefer to have an intermediary involved. In this case, they can opt for seller financing.

2. Flexible Eligibility

Unlike traditional real estate investment loans that have fixed eligibility criteria, such as interest rates, loan-to-value (LTV) amount, high mortgage rates, tax returns disclosure and debt-to-income (DTI) check, seller financing provides more flexibility in the criterion. Investors with average credit score, or higher LTV can also apply for seller financing over other loan to buy rental property., loan-to-value (LTV) amount, high mortgage rates, tax returns disclosure and debt-to-income (DTI) check, seller financing provides more flexibility in the criterion. Investors with average credit score, or higher LTV can also apply for seller financing over other loan to buy rental property., loan-to-value (LTV) amount, high mortgage rates, tax returns disclosure and debt-to-income (DTI) check, seller financing provides more flexibility in the criterion. Investors with average credit score, or higher LTV can also apply for seller financing over other loan to buy rental property.

3. Simpler Loan Approval

As the lender is the property owner themselves, the loan approval process remains slightly lenient. Consider the investor’s current financial scenario, the property owner may also open a scope of negotiation to discuss interest rates, upfront downpayment, repayment duration, and monthly mortgage payment.

4. Applicable for All Property Types

In comparison to other loan to buy rental property, seller financing means the owners get to earn the interest rate as well. Thus, they are willing to provide seller financing options on different types of properties including single-family homes, multi-family homes, apartments, condos, offices, and other commercial property.

5. Lower Origination Fee

In seller financing, typically there are no high loan origination fee, underwriting fee, part payment fee, or early closing costs, so investors save on these costs as well.

6. Open for Refinancing

Just like traditional loans to buy rental property, seller financing is available for refinancing as well. Meaning, after purchasing the property from owner, customers can refinance the loan to secure lower interest rates or increase loan duration. Refinancing is a smart investment strategy that can help you avoid the disadvantages of seller financing.

Disadvantages of Seller Financing

Just like other loans to buy rental property, seller financing also has its own set of disadvantages. This includes:

1. Higher Interest Rates

As the property owner primarily takes a risk on you, the interest rate is charged on a higher side.

2. Larger Down Payment

Because of the same reason stated above, the property owner may require you to make a larger down payment.

3. May Include Balloon Payment

In other loan options, monthly payments remain stable, which also helps you manage cash flow and run the rental business as well. In seller financing, the seller may ask for balloon payment, like a combined payment for 6 or 12 months.

4. Less Legal Protection

In traditional loans, customers get more legal protection. There are laws to ensure that there is no harassment involved during the loan tenure. In seller financing, this depends on the nature and reputation of the homeowner.

5. May Sabotage your Business

As you are using the loan to buy rental property, any demands for balloon payments or foreclosure can immensely affect your business.

When to Consider Seller Financing Loan to Buy Rental Property?

Above, we discussed both advantages and disadvantages of seller financing. Let’s discuss for which investors, seller financing may beis the right option.

1. In case other banks or private lenders are rejecting your loan applications for any other type of loan because of alerts on your credit history, high debt-to-income, or any other reason, you can opt for seller financing.

2. When the property owner is in your good connections, has good reputation, or you whole heartedly trust the owner, seller financing again can be a good option.

3. When you are planning to foreclose your loan early but don’t want to pay additional charge, instead of other loans to buy rental property, you can opt for seller financing.

4. In situation where banks are taking too long to scrutinize your financial statements or for qualifying you to higher loan amounts, you can opt for seller financing again.

5. When you don’t require a hard credit pull or want to disclose your financial statements to third-party intermediary, opting for seller financing instead of a loan to buy rental property makes sense.

Alternatives to Seller Financing

For investors that feel seller financing is not the right choice for them, they can look for other alternative loan to buy rental property. Common alternatives include:

1. Mortgage Loan

These are the traditional mortgage loans where you keep the real estate property as mortgage with the bank in exchange for loan. In case of failure to repay the loan, the bank can legally take ownership of the property and auction it to recover the costs. The key benefits of mortgage loan include competitive interest rates, legal protection, and flexible down payment requirements.

2. Hard Money Loans

Just like mortgage loans, a hard money loan to buy rental property keep the investment property as a collateral. The main difference is in the requirements, evaluation process and speed of approval. In traditional mortgages, the banks may take longer to collect all documents, evaluate your eligibility and approve the application. In hard money loans, only the value of the investment property matters and details such as your credit score are overlooked. If the property can yield high value, the chances of approval are high. Mostly, private lenders offer hard money loans, and the interest rate involved is usually higher than traditional mortgage loans.

3. Home Equity Line of Credit (HELOC)

In home equity line of credit, private lenders issue you a credit line against the total property value of your existing property or properties. You can use the credit line to invest in a rental property. As you pay monthly payments, you keep freeing up some credit line. Also, the interest rate is only charged on the amount you withdraw from the credit line. In case of non-payment, it is your older property whose ownership transfers to the owner instead of the new one. Basically, in HELOC, you can treat your existing properties like a credit card.

4. Home Equity Loans

Home equity loans work similar to home equity line of credit (HELOC). The only difference is that in place of using your existing property as a credit card, you can only use it to get one fixed loan. Meaning, once you repay, you don’t free up any credit line. For a future loan, you will need to reapply.

5. Portfolio Loans

Portfolio loans are helpful for those real estate owners who have already taken loans on multiple property. To get a loan to buy rental property again, they don’t need to apply for another loan. Instead, they can combine all their loans under one portfolio loan. Not only does this simplify loan management, but even repayment also becomes easier. With strategic investment, you can use portfolio loans to decrease your interest rates as well.

Eligibility Criteria for Seller Financing and Other Loans to Buy Rental Property

While the eligibility criteria for seller financing are not that strict, and individual sellers would still be willing to issue you a loan, there are some requirements that investors can follow:

1. Credit Score: One of the primary aspects that banks and money lenders use to judge the creditworthiness of an applicant is the credit score. Banks consider a score between 670-749 as good, 750-799 as very good, and 800-850 as excellent. The higher your credit score, the higher your chances of loan approval.

2. Income Stability: Income stability is another criterion that banks evaluate. They use a calculation strategy, called Debt Service Coverage Ratio (DSCR) to evaluate if you make enough income and have enough cash reserves to afford a loan.

3. Business Age: If an investor is taking a business loan to buy rental property, the age of their business may help them close the deal at impressive interest rates. Business age is a highlight of their resilience and also reflects reputation and income stability.

4. Debt-to-Income Ratio: In case the investor has multiple previous debts open and low-income generation, banks may reject the loan. In such a situation, the investor can look forward to portfolio loan or reply for seller financing or mortgage loan after paying back other loans.

5. Down Payment: Paying a generous down payment can increase your chances of approval. Higher downpayment may help secure lower interest rates for your loan to buy rental property.

6. Collateral: In case of mortgage loans, home equity loans, and HELOC, the overall value of the collateral can also help you secure an impressive loan.

Related Article: Down Payments, Loan-to-Value, & Other Key Ratios in Rental Property Financing

Final Thoughts

While there are multiple types of loans to buy rental property, seller financing truly stands out as it eliminates all third-party intermediaries. Nevertheless, as discussed above, seller financing also comes with its own set of advantages and disadvantages. In case you can trust the property owner, seller financing can be a good option. In all other scenarios, we recommend exploring alternatives like mortgage loans, hard money loans, HELOC and home equity loans as well. For a better idea, it is best advised to consult a loan professional who can guide you on the right type of loans for the investment.